Banks face default risks on dollar-denominated bonds

Most Nigerian lenders that hitherto hurried offshore to issue bonds are faced with significant risk of default as it becomes increasingly difficult sourcing FX to service international obligations.

Declining oil prices and the unwillingness of the Central Bank of Nigeria (CBN) to devalue the naira, amidst constrained foreign reserves, continue to worsen the FX liquidity position of Nigerian banks.

The Adesoji Solanke, led analysts at Renaissance Capital, estimated that banks in their coverage universe have at least $1.5billion (about N400billion) worth of debt repayments to make in 2016.

This includes $500million for GTBank, $419million for Zenith and $202million for FCMB. Nigerian banks have approximately $3.4billion (over N1trillion) worth of Eurobonds in issue, they added. “While we think the banks can still meet coupon repayments, we believe it is becoming increasingly difficult to source FX to service obligations. “Given the macro risks, we understand borrowing costs are now 50-200 basis points higher than three-to-six months ago, which is negative for margins, as we think the banks may be limited in their ability to pass on higher pricing to already stressed customers”, said Solanke, who leads RenCap analysts covering Sub-Saharan African banks.

Nigeria’s widening FX margins, particularly in the parallel market, signposts a big crisis for local institutions that borrowed in foreign currency.

As investors eagerly expect their Full Year (FY) 2015 earnings at the Nigerian Stock Exchange (NSE), most Nigerian lenders rising obligations in the offshore debt market,  driven by rising FX risk,  is expected to have a rob-off on returns to equity holders.

Only recently, the CBN lifted a ban which has stopped commercial banks from accepting cash deposits of foreign exchange from customers.

Reid W Click, a professor of International Business, at George Washington University, United States of America said, “The foreign countries interest rates may seem lower, but in real terms, it is not necessarily lower. Default risks that may arise from a local country’s foreign exchange (forex) and inflation rates should not be ignored.

“Foreign currency debts simply move the risks from the lender to the borrower. Issuers (Companies) should always evaluate the cost of debts against the risks of debts. The preferred Habitat Theory asserts that the liquidity premium could be on any term. Portfolio investors want to hold foreign currency bonds rather than local currency bonds,” Click said.

The Consumer Price Index report released recently, by the National Bureau of Statistics (NBS) showed that headline inflation in December rose to 9.6percent year-on-year (y/y) against November rate at 9.4 percent. This was ahead of analysts’ expectation of 9.5percent, making it the highest increase in inflation rate seen since December 2012.“

The record expansionary budget for 2016 is hinged on non-oil revenue, with a view to deviating from historical trend, an attempt we believe will likely be faced with execution challenges”, according to analysts at United Capital plc.

Analysts said the yield curve on corporate bonds is dominated by the risk-off sentiment of investors, as protracted weakness in oil price and bearish outlook on fiscal finance renew concern on naira devaluation.

“Notwithstanding the easing measures of the Central Bank, which resulted in the correction of the yield curve in Q4’15, the outlook for bond yields is dependent on the interplay between demand and supply”, said research analysts at Lagos-based investment firm, CardinalStone Partners Limited.

The bond market is experiencing quiet trading sessions, as dealers await the outcome of the Monetary Policy Committee (MPC) meeting which started Monday through today, said research analysts at Lagos-based Dunn Loren Merrifield.

The Gregory Kronsten-led team of research analysts at FBNQuest said marginal participation by the offshore community is likely to persist until the country’s macro environment, as well as liquidity in the FX market improves.

Iheanyi Nwachukwu